2020 BASQUE COUNTRY COMPETITIVENESS REPORT

2020 Basque Country Competitiveness Report. Resilience: Before, during and after the pandemic2020 BASQUE COUNTRY COMPETITIVENESS REPORT RESILIENCE: BEFORE, DURING AND AFTER THE PANDEMIC
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© Authors © Basque Institute of Competitiveness – Deusto Foundation
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ISBN: 978-84-1325-101-1
Resilience: Before, during and after the pandemic
Susana Franco, Edurne Magro, James Wilson (Editors)
Roberto Álvaro, Mari José Aranguren, Francisco Carrillo, Miren Estensoro, Jorge Fernández, Susana Franco, Ibon Gil de San Vicente,
Bart Kamp, Macarena Larrea, Miren Larrea, Edurne Magro, Jaime Menéndez, Mikel Navarro, Carla Peletier, Jabier Retegi,
Eduardo Sisti, James Wilson, Agustín Zubillaga (Authors)
Amaia Azpiazu, Megan Briggs, Patricia Canto, Asier Murciego, Elsa Patús, Angélica Rodríguez, Juan Pablo Salado, Etorne Ugalde,
Nagore Valle, Rakel Vázquez (Collaborators)
2020 Orkestra - Basque Institute of Competitiveness
Deusto Foundation
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Access the Report Online
The Basque Country Competitiveness Report 2020 and other background papers are available in PDF format via the following link:
https://www.orkestra.deusto.es/en
Access the Regional Competitiveness Observatory Online
Furthermore, updates of the different indicators presented in the Competitiveness Report can be consulted in real time via Orkestra’s Regional Competitiveness Obser- vatory. To access the observatory please click here:
www.orkestra.deusto.es/competitiveness-observatory
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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1 The competitiveness of the Basque Country before the pandemic . . . . . . . . . 4
1.1 Positioning and variation of the Basque Country in competitiveness indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 Employment, living conditions and inequality . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.3 Situation of the business fabric: Behavior and performance . . . . . . . . . . . . 13 1.3.1 Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.3.2 Internationalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.3.3 Firm finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1.3.4 Labor costs and productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.4 Starting point for digital and energy transitions . . . . . . . . . . . . . . . . . . . . . . . 25
1.4.1 Digital transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1.4.2 Energy transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2 Resisting the pandemic: Impacts and vulnerability . . . . . . . . . . . . . . . . . . . . . . . 32
2.1 Short-term impacts of the pandemic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.2 Asymmetric impacts by sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.3 Sector resilience in the short term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3 Resisting the pandemic impacts and vulnerability . . . . . . . . . . . . . . . . . . . . . . . . 50
3.1 Digitisation as a business response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
3.2 Policies as a response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
3.2.1 Measures aimed at fostering short-term resilience . . . . . . . . . . . . 54 3.2.2 Measures aimed at fostering long-term resilience . . . . . . . . . . . . . 59
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4 Resilience after the pandemic rebuild, renovate, transform . . . . . . . . . . . . . . . 61
4.1 Building future resilience from the resilience of the past . . . . . . . . . . . . . . . 62
4.2 Resisting and adapting ‘here and now’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
4.3 Leading the transitions towards a new and sustainable competitiveness . 66
Bibliographic references . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Appendix 1. Values for competitiveness indicators . . . . . . . . . . . . . . . . . . . . . . . . . 75
Appendix 2. Evolution of competitiveness indicators . . . . . . . . . . . . . . . . . . . . . . . 77
Appendix 3. Ranking of the Basque Country in competitiveness indicators . . . . 82
Appendix 4. Methodological notes on the 2018 Oslo Manual . . . . . . . . . . . . . . . . 84
Appendix 5. Profile of basque exporters compared to Spanish . . . . . . . . . . . . . . 86
Appendix 6. Trends in labour costs and productivity . . . . . . . . . . . . . . . . . . . . . . . 87
Appendix 7. Energy transitions index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Appendix 8. Characteristics of firms by 38 sectors . . . . . . . . . . . . . . . . . . . . . . . . . 91
Appendix 9. Firms in a situation of economic-financial vulnerability . . . . . . . . . . 92
Appendix 10. Anti-crisis measures in Baden-Wüttemburg, Upper Austria and the Basque Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
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Table 1.1 Ranking of the Basque Country in competitiveness indicators . . . . . . . . . 8
Table 1.2 Permanence in the workplace (2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 1.3 Percentages of firms with 10 or more workers innovating (2018) . . . . . . 15
Table 1.4 Profile of Basque exporters compared to Spanish exporters (2018, 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table 1.5 Foreign direct investment flows (% of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table 1.6 Firms with foreign shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Table 1.7 Main indicators of economic and financial position . . . . . . . . . . . . . . . . . . 22
Table 1.8 Labor cost per employee (LCE), Productivity and Unit Labor Costs (ULCs) (2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table 2.1 Characteristics of sectors that determine the impact of the crisis and recovery potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Table 2.2 Initial impact of the crisis by sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Table 2.3 Distribution of branches of activity according to predicted recovery period quartile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Table 3.1 Typology of business responses to the impacts of the crisis on their activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Table 3.2 The European response to the pandemic emergency . . . . . . . . . . . . . . . . 55
Table 3.3 National responses aimed at the business fabric during the emergency phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Table 3.4 Main measures taken at regional level to support the financial situation of companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
List of tables
Graph 1.1 Job quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Graph 1.2 Economic conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Graph 1.3 Change in average per capita equivalent income by income deciles (%, constant prices 2016) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Graph 1.4 Evolution of the value of exports of goods valued in euros (2007=100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Graph 1.5 Inward and outward FDI stock (% of GDP, 2019) . . . . . . . . . . . . . . . . . 18
Graph 1.6 Labor cost per employee, and productivity (GVA per employee) for the economy of the EU-28 regions as a whole (2018 or closest year) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Graph 1.7 Labor cost per employee, and productivity (GVA per employee) for the manufacturing industry in the EU-28 regions (2018 or closest year) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Graph 1.8 2019 DESI Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Graph 1.9 2019 WiD Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Graph 1.10 System Performance Indicator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Graph 1.11 Normalized value of the System Performance Indicators . . . . . . . . . . 29
Graph 1.12 Evolution of some of the System Performance indicators in the Basque Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Graph 2.1 Year-on-year rate of change in GDP (%) . . . . . . . . . . . . . . . . . . . . . . . . . 33
Graph 2.2 Unemployment rate (% active population) . . . . . . . . . . . . . . . . . . . . . . 33
Graph 2.3 Unemployment rate Basque Country (% active population) . . . . . . . . 34
Graph 2.4 Industrial Production Index. Year-on-year rate (%) . . . . . . . . . . . . . . . 35
Graph 2.5 Services Index. Year-on-year rate (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Graph 2.6 Year-on-year rate of change (%) of Basque Country exports by destination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Graph 2.7 Variation in main exports from the Basque Country . . . . . . . . . . . . . . 37
Graph 2.8 Intensity of use of inputs produced in the Basque Country . . . . . . . . 38
Graph 2.9 Typology of sectors according to their links with others in the Basque Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
List of graphs
List of graphs
Graph 2.10 Evolution of the Industrial Production Index by sector (January- August 2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Graph 2.11 Import dependence in the 10 most important non-energy chapters in the Basque Country, 2019 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Graph 2.12 Percentage of total Basque imports from a single supplier country . 45
Graph 2.13 Risk by branch of activity in the Basque Country . . . . . . . . . . . . . . . . . 48
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List of illustrations
Illustration 4.1 Resilience in different time horizons . . . . . . . . . . . . . . . . . . . . . . . . . . 62
List of boxes
Box 1 Interrelations between sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Box 2 How much do Basque importers depend on a single country? . . . . . . . 44
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Since 2007, when Orkestra published its first Competitiveness Report, the Basque society has advanced and managed to reach a remarkable position of strength in relation to the context of European regions. Among others, its position in economic performance, low risk of poverty and high social inclusion indicators are particularly noteworthy. These advances do not detract from the fact that there are still areas for improvement, such as quality of employment, the incorporation of women and young people into the labor market, and the reinforcement of R&D&I.
In this context, we have been hit by the COVID-19 pandemic. This crisis is generating an enormous human and social cost, which is spreading to our economy, people and companies. Some of the characteristics of the current times include the huge uncertainty to which we will have to adapt, the unequal impact it has on the various sectors, the accel- eration of the economic transitions it is generating, and the reconfiguration of the value chains in our economy.
Reacting to this reality is an individual and collective responsibility as a society. Orkestra, in its mission to support public and private actors in taking decisions with the best possible information, has taken up the challenge by strengthening and redirecting its analyses on the competitiveness and welfare of the Basque Country, and on the evolution of the factors that affect us.
The Competitiveness Report 2020 is a snapshot of the current situation that identifies the most relevant trends that will affect us in the coming months and in the context of the pandemic. These trends are generating threats to be managed and opportunities to be seized. The Basque Country is equipped with many assets to successfully face the current reality, since it has capable and talented people, a productive ecosystem of innovation and business, as well as fiscal tools. All this must be put to good use and action must continue as Europe’s leading regions continue to make progress and devote substantial resources.
The future is in our hands and is being built day by day. That is why our commitment as Orkestra is to continue generating knowledge to tackle the challenges we face in the Basque Country and contribute to sustaining its competitiveness and socio-economic development.
Finally, we would also like to highlight the excellent work, involvement and commitment of all the people who are part of and collaborate with Orkestra, as well as the sponsoring institutions that support us. Without their support, Orkestra would not be a reality or an international benchmark in regional competitiveness.
Iván Martén Uliarte Chairman, Orkestra-Basque Institute of Competitiveness
Deusto Foundation
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The Basque Country Competitiveness Report 2020 was produced with funding from SPRI, the Basque Business Development Agency, which reports to the Basque Gov- ernment.
The Report has been prepared by a group of people coordinated by Susana Franco, Edurne Magro and James Wilson; the entire Orkestra team was also involved in a vari- ety of ways, and we thank them for their collaboration throughout the entire process. We would also like extend our thanks for the contributions of the members of the Board of Directors and the Advisory Board, as well as Orkestra’s sponsor institutions.
Calculation of the variables that form part of the Basque Country Competitiveness Ob- servatory, on which this report is based, as well as preparation of other analyses in the same, was possible thanks to data provided by Eustat by means of purposeful and im- partial exploitation of its databases at Orkestra’s request. Our sincere thanks to Eustat for all the assistance provided. We would also like to thank Sabi-Informa, INE and ZEW for their collaboration in providing data for other analyses in the Report, and the support of the Basque Institute of Finance in applying financial analysis methodologies.
The digitisation analysis was carried out with the invaluable collaboration of ADEGI, BIC Araba, the Basque Country Maker Community, Comet, Dorlet, E Process Med, Er- ictel, Fegemu, Geminys, Grupo Berdin, Ibermática, Ikusi, Ingeniariak-Gipuzkoa Col- lege of Engineers, the Basque Country Digital Transformation Office, the Basque Country Network of Technology Parks (RPTE), Salto Systems, SENER, Sherpa. ai, Tec- nalia, the Init Health, and Virtualware.
The comparative view of policies has benefited from the contributions of representa- tives of the Basque Government and SPRI in the Basque Country and Germany, Busi- ness Upper Austria in Upper Austria, the Fraunhofer Institute in Baden-Württemberg and a small sample of companies with establishments in one of the three regions (Basque companies established in Germany and/or Austria and vice versa).
In addition, we would like to extend our thanks for the involvement of all the stakeholders who have participated and contributed to generating knowledge as part of the various projects carried by Orkestra in recent years.
Orkestra assumes full responsibility for any errors or omissions in the content of this report.
Acknowledgements
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The COVID-19 pandemic and the measures implemented to combat it have caused a socio-economic crisis that is unique in its global reach, severity, and combined social and economic impacts. The Basque Country has experienced other crises in recent decades, in the context of which a resilient economy and society have been built. In this Report, we analyze that resilience: before, during and after the pandemic.
Building resilience is a long-term task, which requires working within different time- frames. In fact, the resilience of the Basque Country will depend on: (1) the foundations of competitiveness built thus far; (2) how the crisis situation is responded to in the short term; and (3) the ability to lead the fundamental transitions that will mark the way to sustainable competitiveness in the long term.
Short-term resilience - Supporting employment - Ensuring the survival of healthy companies
Long-term resilience - Green transition - Digital transition - Demographic-social transition
Existing foundations of competitiveness
1. Foundations of Basque Country competitiveness prior to the pandemic: From where did we start?
The Basque Country entered the crisis in a strong position to face its impacts and to build resilience for the future. In 2019, it ranked very well across many of the key indicators of competitiveness in comparison with European regions and with the rest of the Spanish regions. Moreover, more than half of the indicators analyzed had improved with respect to the previous year. Particularly noteworthy are the result indicators, where the Basque Country is among the top European regions in GDP per cap-
Executive summary
Ex E c u t i v E s u m m a r y
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ita and in the low percentage of the population at risk of poverty or social exclusion. This highlights the inclusiveness of the competitiveness model that has been developed.
The main challenge concerns employment, especially in the context of a crisis that implies a new negative shock in this area. Despite positive developments in recent years, the long-term unemployment rate was still above most European regions in 2019. Furthermore, although job creation was increasing, job quality analysis shows high levels of temporality and undesired partial employment. The measures taken to counteract the impacts of the crisis should consider this situation, so that it does not end up affecting especially the most vulnerable groups.
The report also highlights several strengths where further advances will be important to build the resilience of the future, as well as some areas for improvement, particularly with respect to the Basque Country’s most comparable regions.
• Economic and financial position of the firms: The healthy economic and financial position of Basque firms is an asset for resilience in the short term, although their greater use of working capital finance may become a threat in the medium term, as this type of financing is more susceptible to being reduced in times of crisis.
• Skills: The high level of qualification of the population can be taken advantage of to change, adapt and transform the economic model, especially if it is leveraged in an appropriate manner taking into account elements analyzed in the previous Bas- que Country Competitiveness Report (Orkestra, 2019). These processes of transformation and renewal are more difficult without a qualified population that is inter- ested in further training to adapt their skills to a changing work environment.
• Investment in R&D&I: Priority should continue to be given to investment in R&D&I, increasing the expenditure made, in order to be able to react with the necessary innovations that will enable Basque firms to continue to keep abreast their competitors and to respond to the needs of the population. In particular, collaboration with actors abroad and between science and industry should be reinforced, and scientific and technological capacities should be better linked to the market.
• Unit labor costs: The slight advantage in unit labor costs in the manufacturing industry compared to Germany, and compared to other regions that are comparable in industrial structure, underlines the need to keep unit labor costs under con- trol through productivity increases.
• Internationalization: The pool of exporting companies has increased, and the challenge is to further consolidate this pool by increasing both the percentage of companies that export regularly and the average volume of exports over turnover, and by growing presence in the most dynamic markets.
• Digitization: The advanced positioning in digitalization, especially in terms of con- nectivity and digitalization of business models of firms, as well as progress in terms of digital supply of public services, provides a good foundation from which to address the digital transition. It will be important to consolidate the use of digiti- zed services in a world where electronic interactions are increasingly important, as well as to achieve greater and improved incorporation of women in the digital environment.
• Energy ecosystem: Strengths include the increasing diversification of fuel imports, as well as good results in access to and security of energy. The main challenges for
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the energy transition are associated with greenhouse gas emissions in key sectors such as mobility and buildings, the need to make further progress in improving energy efficiency in general, as well as energy intensity in the industrial sector, and in achieving a diversification of primary energy sources more geared to the challenges of decarbonization.
2. Resisting the pandemic: How have we responded in the short term?
During 2020 the pandemic has had a strong impact on the economy, reflected in a severe drop in the industrial production index and a reduction in foreign trade activity, as well as an unprecedented fall in GDP and a rise in the unemployment rate. However, the impacts have been asymmetrical across sectors, being particularly severe in the case of Hotels and restaurants, Trade and transport equipment, and severe, to a lesser extent, in Metallurgy and metal products, Rubber, plastic and other non-me- tallic products, Construction, transport and storage, Recreational and cultural activities and Education.
An important component of resilience is responses in the short term from the mo- ment a shock occurs. The pandemic has been an extraordinary event, unknown to our generations, in which each firm, institution and person has had to respond to the impacts in different ways, many of them with radical changes in their day-to-day lives and also in their strategies for the future. Recognizing the high difficulty of deal- ing with this scenario, the analysis shows that in general the responses in the Basque Country in this immediate period of crisis have been swift and similar to those of other benchmark regions.
The capacity for resistance in the short term has been supported by a solid economic and financial situation, in general, of Basque firms, together with good digitalization foundations. The first response to the health emergency meant that almost all activities had to be adapted quickly to completely new circumstances in which the potential of digital technologies came to the fore. An “express digital transformation” has been set in motion in many firms with respect to product (adaptation between the product and its demand), process (implementation of new processes), and/or channel (when the digital channel has been the solution for maintaining sales).
In terms of public policy, the Basque Country has given a very similar response to Baden-Württemberg and Upper Austria, two regions that share a similar productive structure, and therefore share challenges in facing the crisis. The measures in the three regions have focused on two main pillars: (1) sustaining the financial situation of firms to keep economic life going; and (2) supporting firms in the process of digitization to cope with the new context. In addition, other measures such as support for R&D projects for the management of the pandemic or specific sectoral support for those most affected, such as tourism and culture, stand out.
Given the high level of uncertainty regarding the evolution of the pandemic and the measures to counter it, the agility to resist and adapt ‘here’ and ‘now’ will be particularly important in the immediate future. It is imperative to continue to quickly adapt business behavior and policies in targeted support of improved competitiveness. Without agility or precision in response, the risk is that other regions and their busi-
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nesses —perhaps less affected at different times by the pandemic— may get ahead of the curve.
This implies, on the one hand, that policy measures should consider the differenti- ating sector, for which it is important to expand upon diagnostic processes and sector intelligence. It is especially important to have better access to the data that the different administrations collect, but these secondary data must be complemented with the obtaining of strategic intelligence more immediately through dialogue with firms. For this reason, entities such as the Cluster Organisations or the County Devel- opment Agencies are critical allies for government when it comes to making strategic decisions.
On the other hand, the agility of response depends on the coordination of the actions of the various levels of government, adapting the actions to the specificity of each territory to guarantee the best coverage of its needs. In fact, one of the lessons learned from the health emergency has been the suitability of promoting models of co-governance that consider both the context and severity and complexity of the current crisis in each place.
Finally, short-term responses also play a role in building medium- and long-term resilience. In this sense, European and national policies establish a framework for a “green, digital and fair” recovery in which the regions have room to put forward their own strategies (Next Generation EU). The large injection of funds foreseen for recovery and resilience in the following years under this framework represents a significant opportunity. But it will be particularly important to direct them towards investments, even in the short term, that seek to increase productivity and facilitate green, digital, and social-demographic transitions.
3. Post-pandemic resilience: transition to a new sustainable competitiveness
Moving from a phase of resistance to a phase of recovery implies taking advantage of the windows of opportunity that arise from all crises, and that can lead to a modifica- tion of previous growth trajectories. From an evolutionary perspective of resilience, these opportunities involve reorienting the economy, which means not returning to a previous state but instead, leading the search for a new model of competitiveness that is more sustainable and inclusive. To this end, it is essential that all actors in the territory pull together to take advantage of the new opportunities surrounding the green, digital and demographic-social transitions. In this regard, the Report identifies seven key recommendations.
1. Digitalization, a transversal lever of resilience The digital transition must be a lever to strengthen competitiveness in all sectors
as well as facilitating green and demographic-social transitions. Although the DESI index places the Basque Country in a good position —especially in relation to con- nectivity, integration of technology in firms and digital public services— there are weaknesses in translating that into new digital business models in the private sector and into citizen demand for digital public services. Therefore, it is not only important to incorporate technology, but also to improve skills and competences in companies, government and society.
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2. Sustainability, an opportunity and competitive advantage The green transition must be approached as an industrial and technological op-
portunity for the Basque economy, so that all sectors evolve their practices in ways that strengthen their competitiveness in an evolving context that demands and rewards sustainability. Above all, this means putting the strengths of the Bas- que Science, Technology and Innovation Network at the service of the green transition. In particular, actions related to the food system, the mobility system and the energy system will have a significant impact on the environment and on greenhouse gas emissions. It will therefore be essential to make investments in innovation in these areas.
3. The foundational economy, a source of economic development It will be important to contribute to the demographic-social transition by stren-
gthening those parts of the economy that are essential to human well-being, such as health, food, education and care. The pandemic has highlighted the importance of the so-called ‘foundational economy,’ both for the well-being of the population and for the resilience of other sectors on which competitiveness policies have traditionally focused. Taking advantage of these synergies and working on the potential of the foundational economy as a source of opportunity for the economic development of the region is therefore a major challenge.
4. Skills, a transversal lever of resilience The processes of transformation and renewal that support resilience in the long
term require the continuous development of the skills of the people in a territory. Therefore, it is necessary to act to ensure that the Basque Country has people with the necessary skills to promote the digital and green transitions from business, government and society in general. As analyzed in the previous Basque C ountry Competitiveness Report (Orkestra, 2019), it is particularly relevant to work on the agility of the skills ecosystem, adapting the different training modalities and attracting international talent.
5. Public administrations, a catalyst for transition With instruments such as investments, public procurement or the promotion of
business collaboration platforms, public administrations will have to play a driving role in the generation of new solutions and innovations, new companies and business models, as well as the infrastructure needed to address the transitions. Likewise, they must become a digital, agile administration that is responsive to ci- tizens.
6. Public-private collaboration, towards an intelligent and sustainable strategy The driving role of public administrations should be positioned in the context of
a sophisticated public-private partnership, such as the one that has been developed through the Basque Country’s smart specialization strategy (RIS3 Euskadi). It will be important to evolve this innovation strategy from a Smart Specialisation Strategy (S3) to a Sustainable Smart Specialisation Strategy (S4) that will serve as a lever for generating common projects oriented towards recovery and transitions, through existing public-private partnership mechanisms such as Pilot Groups and Cluster Organizations.
7. Co-governance, through multi-stakeholder and multi-level collaboration The ability to drive forwards digital, green and socio-demographic transitions will
also depend on how the capacities and actions of multiple actors at multiple territorial levels are harnessed. This requires more effective governance, building on
x v i i i
existing relational structures to: (1) reinforce co-governance between the different administrative levels (local - regional - state - European), ensuring a clear distribution of roles that avoids duplication and takes advantage of synergies; and (2) ensure that the multiple territorial actors (firms, universities, technology centers, cluster organizations, etc.) play a relevant role.
In short, recovery requires reorienting the Basque economy by taking advantage of the opportunities provided by transitions. But also combining this medium- and long- term reorientation with short-term measures aimed at those firms and sectors with the greatest difficulty in recovering, but with potential for the future. All this without forgetting measures that protect the most vulnerable groups, thus mitigating situations of inequality.
In conclusion, resilience is a process of constant change in which different measures will have to be adapted and implemented at different times, in response to context and capacities, and the learning that is continually generated. In this sense, the Basque Country entered the pandemic with a series of strengths in its competitiveness fundamentals on which to build its responses. The measures adopted in the short term, at a time of great uncertainty and difficulty, have been rapid, flexible, and similar to other benchmark regions. However, the uncertainty of the pandemic remains for now, and in the coming months the key will be to combine resistance measures with a vision of investing in the transitions that will ensure the resilience of the Basque Coun- try in the future.
1
2020 is an extraordinary year for analyzing and promoting competitiveness, both in the Autonomous Community of the Basque Country and in all other territories. The COVID-19 pandemic has provoked a socio-health crisis whose high human cost is spreading throughout the world. This crisis itself, and the measures put in place to combat it, have also led to an unprecedented global socio-economic crisis. In the context of a highly integrated global economy, supply chains have been badly dis- rupted. In addition, each territory has seen different combinations of supply and demand shocks related to containment measures, to the reorientation of resources to the health system, and to a generalized environment of high uncertainty (with its im- plications for consumption and investment).
Although this crisis is clearly unique in its global scope, seriousness and combination of social and economic impacts, the Basque Country has experienced other crises in recent decades in the context of which a resilient economy and society have been built. In fact, the model of ‘competitiveness in solidarity’ that character- izes the Basque Country had its origin in the deep industrial crisis of the 1980s. Fo- cused on industry as a driver of the economy and strengthened by investments in science, technology and innovation, this model has proven its resilience over some 40 years. Most recently this is evidenced by a comparatively lower impact than that of other Spanish regions during the financial crisis of 20081 and a stable and bal- anced growth from 2014 onwards. The new scenario caused by the pandemic urges us to analyze this resilience and to reflect on the foundations that support it, along with the changes needed to maintain it in the future. For this reason, the focus of this 2020 Competitiveness Report is on resilience.
As was the case in the period after the financial crisis, the concept of resilience is very much in vogue today. However, it is a concept that can be interpreted from different perspectives. Although the concept has its roots in the Latin word resilire, which means to regress or bounce back, there are three main meanings of the concept in its contemporary usage.
1 For detailed analysis of the resilience of the Basque Country, see among others: Aranguren et al. (2020), Cuadrado & Maroto (2016), Cueto et al. (2017), Holl & Rama (2016), Magro (2020) and Magro & Valdaliso (2019).
Analysis of the resilience of the Basque Country is timely in the context of a pandemic that generates enormous challenges
Introduction
2
2020 Basque Country Competitiveness report: resilienCe: Before, during and after the pandemiC
ILLUSTRATION Three meanings of resilience
Engineering Ecological Evolutionist
The ability of a system to return to the pre-disturbance
equilibrium (status quo)
The ability of a system to persist in the face of change,
finding new equilibria
transform
Source: Compiled by authors, based on Davoudi et al. (2013).
In the context of the profound structural changes that characterize our society in 2020, it is pertinent to focus above all on the third perspective, the evolutionary one. In this sense resilience is not a question of going back to where we were prior to the pandemic or simply coping with it as an external impact. It means being able to transform our competitiveness model continuously to take advantage of the opportunities offered by the major transitions —digital, green2 and social-demographic— that we are experiencing.
Although the pandemic has accelerated and/or changed the importance of some of them, these transitions were very much present prior to the pandemic. The green and digital transition were already defined as the two key levers of the European Commission’s industrial policy (European Commission, 2020a) in the roadmap towards a sustainable Europe contained in the European Green Pact (European Com- mission, 2019). For its part, the Basque Government included three transitions —technological-digital, energy-environmental and demographic-social— in the strategic and economic bases of the new Science, Technology and Innovation Plan (PCTI) 2030 (Basque Government, 2019). These transitions were also implicitly recognized in the Basque Country Agenda 2030 (Basque Government, 2018), the action plan to respond to the global challenge of achieving the 17 Sustainable Development Goals (SDAs) (United Nations, 2015).
In this context, the resilience of a territory is closely related to the capacity of its firms and institutions to adapt to major changes and social challenges in a spirit of transformation. In fact, in its first Strategic Outlook Report, the European Com- mission (2020b) marks resilience as a new compass for European policies and dis- tinguishes four dimensions where policies can foster resilience: socio-economic, green, digital, and geopolitical. These four dimensions are clearly interlinked today —for instance, it is not feasible to promote economic competitiveness without con- sidering the social contract or the ability of industry to go digital or become more sustainable— and point to the importance of policies capable of promoting adaptability.
Therefore, we understand the resilience of the Basque Country as the capacity to change, adapt and transform, both with respect to the effects of the pandemic and to the digital, green and social transitions that will mark sustainable development in the coming years. In this regard building resilience is a task for the long term; it is not something that can be built from yesterday to today, or from today to tomorrow.
2 The term green transition is used to refer to the transition to a more environmentally sustainable economy and society, which includes the energy transition as an important element.
The digital, green and social-demographic transitions are opportunities to transform our competitiveness
Building resilience is a long term task
3
IntroductIon
As noted in the first article published by Orkestra in the COVID-19 reflections series in April 2020 (Wilson et al., 2020), the socio-economic crisis caused by the pandemic can be conceptualized in two phases: one of resistance, and another of reconstruction and renewal. However, when these two phases are related to the concept of resilience, the boundaries between them are blurred. In the resistance phase the immediate focus is on short-term resilience, or our ability to change, adapt and transform during the pandemic to safeguard our socio-economic activity. But in turn this short-term adaptation, together with the characteristics and trajectory of our system prior to the pandemic, helps lay the foundation for the reconstruction and renewal needed to be resilient in the long term.
The Report is therefore structured through its four chapters around analysis of the past, present and future.3 The first chapter uses the framework employed in previous Basque Country Competitiveness Reports to analyze its pre-pandemic competitiveness foundations. After a general presentation of the positioning and variation of the Basque Country in competitiveness indicators, using the most recent data available, the chapter looks in depth at three elements where particularly important mes- sages are emerging: (1) employment, living conditions and inequality; (2) business behavior and performance in various areas; and (3) energy and digital transition.
The second and third chapters are focused on the present, and the resistance to the pandemic in the Basque Country. The second chapter analyzes this resistance from the perspective of impacts, with respect to the situation in general and specifically focusing on the asymmetric vulnerability of different sectors. The third chapter analyzes resistance from the perspective of responses. On the one hand, it considers the responses of firms around digital transition, which has been accelerated in certain aspects by the pandemic. On the other hand, it focuses on the policies implemented in response to the pandemic, both in the Basque Country and in other regions that share similar features in their industrial structures.
Finally, by way of conclusions, the fourth chapter turns to the future and reflects on what is needed to promote resilience from now on. Based on the analysis of the previous chapters, previous Competitiveness Reports, and current reflections within various projects with stakeholders (both in the Basque Country and internationally), we propose a series of recommendations. These recommendations are aimed at building on the foundations of resilience already achieved in the Basque Country, resisting and adapting to the immediate challenges of living with the pandemic, and leading the transitions needed to achieve better and more sustainable competitiveness.
3 The analysis of the report is partly built on a series of 4 background papers that have been progres- sively developed and published during 2020 as part of the COVID-19 Regional Competitiveness Observa- tory established by Orkestra to support public policy makers in the context of the pandemic: Magro et al. (2020); Retegi et al. (2020); Wilson et al. (2020); and Zubillaga & Peletier (2020).
The report is structured around analysis of the past, the present and the future
4
1.1 Positioning and variation of the Basque Country in competitiveness indicators
This section summarizes the situation in the Basque Country before the start of the pandemic. To this end, it presents its position and variation in a range of competitiveness indicators grouped according to the competitiveness framework developed by Orkestra and which has been used in previous Competitiveness Reports (Illus- tration 1.1). The framework is divided into four levels indicating the various factors which determine regional competitiveness:
1. Outcome indicators. These are the overall goals to be achieved in terms of citizen wellbeing. They include economic indicators, such as per capita income, as well as other, broader elements related to social cohesion.
2. Intermediate performance indicators. While these are not the overall aims to be achieved by the region, they are important to achieving the final outco- mes. They comprise indicators related to employment, productivity and innovation.
3. Determinants of competitiveness. These are the elements that impact the results for the two levels above. This level is particularly important because it is where policies can have a more obvious impact. The determinants are grouped into three categories that reflect the behaviors of firms, the specialization of the territory and its clusters, and the quality of the business environment.
4. Endowments. These refer to certain characteristics of the territory that have an impact on competitiveness, but which can be more or less taken as givens, at least in the medium term (location of the territory, natural resources, size of the region, institutions, etc.).4
4 As these characteristics have been analyzed in previous reports, they are not included in this report (although they have been used, together with the productive structure, to identify a group of regions most comparable to that of the Basque Country).
The competitiveness framework is organized into four levels
1 The competitiveness of the Basque Country before the pandemic
5
ILLUSTRATION 1.1 Framework for competitiveness
Growth levers (productivity, employment, innovation, etc.)
Growth and well-being
Actors and environment
Intermediate unemployment indicators
Source: Compiled by authors.
Table 1.1 shows graphically the situation of the indicators analyzed in this framework, comparing the Basque Country with the rest of the European regions, a group of comparable regions, and the Autonomous Communities of Spain.5 Appendix 1 shows the values of each of the indicators in the Basque Country, the EU-28, the comparable regions, Spain and Germany, and Appendix 2 shows their variation over time. Appendix 3 also contains an analysis of the ranking of the Basque Country in these indicators with respect to European regions, comparable regions and the regions of Spain.6
As Table 1.1 indicates, the situation of the final outcome indicators was very positive in the last year available, with the Basque Country positioned in the top 25% of the rankings in most indicators and, in general, improving or maintaining positions with respect to the previous year in addition to improving in absolute terms. The only exception is the indicator of long-term unemployment. Despite the positive variation maintained in recent years (from 9.7% of the active population in 2014 to 3.7% in 2019), it is still in the lower half of the ranking of European re-
5 Given the United Kingdom’s situation of transition in the European Union, this chapter, which analyzes the situation up to the end of 2019, establishes the comparison with the EU-28 and therefore includes the regions of that country in the comparison. In the next chapter, which analyzes short-term indicators, the European comparison is made with the EU-27.
6 The data and graphs can also be consulted at Orkestra’s Basque Country Competitiveness Observa- tory, which is updated periodically: https://www.orkestra.deusto.es/competitiveness-observatory- eustat/es/ES21/dashboard. Details on the group of comparable regions can also be found at the Ob- servatory.
The Basque Country is situated in the top 25% of regions in most of the outcome indicators
gions and in the lower quartile of comparable regions; this is not the case with the Autonomous Communities of Spain, where it is in a more favorable situation. It should also be noted that, despite the fact that the Basque Country continues to be at the top of the ranking in terms of population at risk of poverty or exclusion, the indicator, which showed a downward trend in recent years, increased from 12.1% to 14.4%. The next section looks at some other indicators related to poverty and inequality.
The evolution of the employment indicators considered when analyzing intermediate performance is generally positive and employment continued to be generated at a higher rate than in other regions, which allowed some positions in the rankings to be increased. However, it has not been possible to eliminate the gap with other European regions, especially the group of regions that have an industrial structure more similar to that of the Basque Country. Particularly noteworthy is the case of youth unemployment (20.8% in the population aged 15-24) for various reasons. The first is that in absolute terms it doubled the unemployment rate of the whole population (which was below 10%). The second is that, after several years with a downward trend, for the last two years this trend seems to have stagnated and the rate even increased slightly last year. Finally, the third is that the Basque Country lost several positions with respect to other regions (ten in Europe as a whole and two with respect to similar regions), which indicates that in other territories this indicator had indeed followed a downward trajectory. The analysis of employment is completed in the next section, with a more detailed look at aspects that have to do with its quality, since it is not only a question of continuing to generate employment but also of ensuring that this employment is of good quality.
As for the other intermediate performance indicators analyzed, the migration balance continued to improve and shows a region that was attracting population, as a result of the improved economic situation. Linked to the good performance of GDP per capita, productivity (measured in purchasing power parity) continues to be at the top of all the rankings considered, and this is a topic that will be addressed later in this chapter.
In terms of innovation performance, comparisons with European and comparable regions show better results in terms of publications than in terms of patents. In the latter, which is one of the most common indicators for measuring technological output despite the limitations it presents (since it is more prevalent in some sectors than in others and firms use alternative ways of protecting their intellectual property), there has been a slight deterioration in the rankings that already started from an intermediate situation with respect to the European regions as a whole and even worse with respect to comparable regions. In publications, on the other hand, positions are somewhat better and the trend has continued to be positive. The quality of the publications (measured by their position in the first quartile in terms of their impact fac- tor) also stands out for its good position in the rankings, even taking into account its fall with respect to all European regions last year. This is a consequence of the firm commitment that has been made for some years now to improve the scientific system.
Moving on to the determinants of competitiveness, in terms of collaboration for innovation the indicator on patent co-invention highlights a challenge of collaborat- ing abroad to produce a greater flow of international knowledge. The low position in
Although employment has been generated, the gap with other European regions has not been closed
7
The compeTiTiveness of The Basque counTry Before The pandemic
the rankings with respect to publications in cooperation with industry also reflect a challenge in terms of greater collaboration and transfer of knowledge between the worlds of science and industry.
However, the Basque Country maintains a relatively good position in the indicators of R&D inputs, especially as regards personnel. Nevertheless, despite remain- ing in the top half of the rankings, it should be noted that public R&D expenditure fell slightly, that in most of these indicators some positions have been lost in the Euro- pean context, and that total R&D expenditure stands at 1.85% of GDP, below the Eu- ropean average of 2.11%. Coping with the consequences of the pandemic will require continuing to maintain high levels of R&D inputs to enable the region to continue to innovate and maintain competitiveness. Linked to this topic, the third section of this chapter analyzes the innovative behavior of firms.
The education indicators show a good position in relation to younger people, with high percentages in both tertiary and vocational education, which helps to correct the worse position in the indicator that measures the percentage of the population aged 25 to 64 with secondary and tertiary education, since in the older strata of the population there is a greater percentage of the population that has not achieved at least a secondary level of education. The emphasis on tertiary education results in a high rate of over-qualification (ratio of people with tertiary education to the population employed in the most skilled occupations). This indicator can be assessed negatively from an efficiency perspective, because it indicates that there are resources that are not being used. However, education has important impacts on individuals and society that go beyond the labor market. Furthermore, from a resilience and adaptability perspective, it can also be interpreted positively, as an in- dication that there are people who have the necessary skills to access more qualified jobs that generate more added value. To be able to access these jobs, it is important that training opportunities is not limited to the formal training usually acquired in the early stages of life. It is therefore important to mention that in the continuous training indicator the Basque Country is above the EU-28 average (13% and 11.3% respectively), but not very well positioned with respect to comparable regions.
Finally, the indicators for which there are regional comparisons of digitization (house- hold access to broadband and online purchases) show an intermediate situation in the former and a low situation in the latter. Although this will be addressed in more detail in the fourth section of this chapter, where both the digital and energy transitions will be analyzed, the situation should be expanded upon here a little more. The broadband access indicator shows a growing trend in all territories over the last dec- ade and almost all territories have a coverage rate of around 90%, so a few tenths of a difference can mean big jumps in the rankings, without being too significant. The indicator for Internet purchases does seem to show that the Basque Country is below the European average. This behavior is likely to have been altered by the pandemic across Europe so it remains to be seen whether the indicators show a significant change from next year. In any case, this indicator may be indicating that the Basque population has a greater tendency towards ‘buying locally’, which has positive nuances.
The Basque Country has a high percentage of qualified people
8
2020 Basque Country Competitiveness report: resilienCe: Before, during and after the pandemiC TA
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From the analysis compared to other regions, it can be concluded that, in general, the Basque economy shows a positive evolution over the last year in most indicators. This suggests that it started off in a strong position to deal with the impacts of COVID-19, although it should be noted that the situation is more favorable when compared to the rest of the Spanish regions and to all the European regions than when compared to regions with a similar industrial structure. Some elements of particular relevance for understanding the baseline situation at the beginning of the pandemic are discussed in more detail below. On the one hand, the employment situation and its characteristics are studied in depth, which al- lows the identification of strengths and weaknesses of the labor market that will be stressed as a consequence of the deep crisis, as well as an analysis of quality of life and inequality indicators to assess what the starting situation was, but also the effect that the 2008 crisis had on people with different income levels. On the other hand, the situation of the business fabric is analyzed with the aim of identi- fying its capacity for resistance in the short term and resilience in the long term. Finally, an assessment is made of the current state of two of the main transitions that will be accelerated in the coming months, the energy transition, and the digital transition.
1.2 Employment, living conditions and inequality
In the previous section, mention has been made of the job creation that was being generated and the need to continue generating it. In this regard, Graph 1.1 shows the variation of several quality of employment indicators, disaggregated by gender. The first graph measures the percentage of self-employed persons (business owners without employees or independent workers) and people who work in family busi- nesses within the working population. It is included as a quality indicator because their working conditions are often not equal to those of wage earners. Fewer people in the Basque Country have these types of occupation than in Spain and the EU-28, but more than in Germany. They are also more prevalent among men than among women and show a downward trend since 2013.
The second indicator has to do with the stability of contracts. Temporary contracts are clearly more prevalent in Spain and the Basque Country than in Ger- many and the EU-28 and are more prevalent among women than men. Temporal- ity has been increasing in recent years and, although there was a slight decrease last year, by 2019 it was at 26.5% for women and 22.1% for men. These percentages were slightly lower in the private sector (22.2% and 20.7% respectively), although still well above the European average, which is below 15% for both gen- ders. In the public sector the percentages are as high as 40.6% for women and 30.4% for men.
However, the permanence in the workplace indicator offers an alternative image, since the Basque Country presented for several years a lower percentage of jobs last- ing less than one year than the rest of the territories considered. In recent years, the percentage of jobs of this duration has been approaching the German and European average. This seems to indicate that, despite the high degree of temporality, some of these contracts could be running for more than a year. This has negative effects both on people (in terms of insecurity and instability), and on key competitiveness factors (e.g. training expenditure) that lead to lower productivity and innovation. The Basque
The Basque Country has strong competitiveness foundations to face the impacts of the pandemic
It is important to keep generating employment of quality
10
Country also stands out (as can be seen in Table 1.2) for the high percentage of persons with a duration of employment of more than sixty months. This suggests a situation of duality, where part of the population has long-term employment and another part high temporality.
TABLE 1.2 Permanence in the workplace (2019)
Men Women
0-11 months
12-23 months
24-59 months
Basque Country 12.9 7.4 15.1 64.7 14.3 7.6 13.4 64.7
UE28 13.5 9.6 16.9 58.9 14.7 10.1 17.2 57.0
Spain 17.4 9.0 15.5 58.2 18.2 9.2 15.2 57.4
Germany 13.3 10.0 15.7 58.1 14.1 10.2 16.9 55.9
Source: Eurostat.
Finally, the last quality of employment indicator shows the percentage of the population working part-time on a non-voluntary basis, in other words those people with part-time contracts who claim that they cannot find full-time employment. This indicates a higher level of precariousness than in Germany and the EU-28, and not far from the pattern in Spain. Moreover, this kind of situation is more prevalent in women: in 2014, it stood at almost 20% and, although it has been falling in recent years, it was still above 12% in 2019, twice as high as the average for women in Eu- rope and three times as high as men that same year.
The combination of all the employment indicators shows a situation in which it had been possible to maintain stable employment in part of the population, but that new employment generated had a high component of temporariness and undesired part- time work, and that these precarious conditions affected women to a greater extent than men. It is these groups with the most precarious jobs who can most easily see their jobs lost due to their temporary nature and who start out in worse conditions because they are employed part-time on a non-voluntary basis. If these jobs are lost as a result of the pandemic or other trends, the living conditions of the population may deteriorate. In this sense, Graph 1.2 adds to the information available in the regional comparison with some indicators that enable some aspects of the economic conditions of the population to be expanded upon.
Median income is a better representation of standard of living than average income, because if high-income groups have very high values, the average values may be quite a bit higher than the respective median values. The values of this indicator con- firm the high average standard of living, which is close to that of Germany. However, in line with what has been said about the poverty or exclusion rate, the indicator of inability to meet unforeseen expenses, despite being better than in the rest of the territories considered, has increased considerably in the Basque Country over the past two years, closing the gap with other places. This situation may be further ag- gravated by the pandemic.
There is a duality in the labour market between long-term employment and high temporailty
Employment precarity is higher among women than men
Groups with precarious employment are in a worse position to face the impacts of the pandemic
11
GRAPH 1.1 Job quality
15
10
5
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
15
10
5
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Employees with a temporary contract (% Total employees) (Men)
Employees with a temporary contract (% Total employees) (Women)
40
30
20
10
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
40
30
20
10
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Jobs with less than one year duration (% pop. occupied) (Men)
Jobs with less than one year duration (% pop. occupied) (Women)
30
20
10
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
30
20
10
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Non-voluntary part-time employment (% pop. occupied) (Men)
Non-voluntary part-time employment (% pop. occupied) (Women)
20
15
10
5
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
20
15
10
5
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Basque Country EU-28 Germany Spain
Source: Eurostat, INE (Spanish National Statistics Institute). Compiled by authors.
12
GRAPH 1.2 Economic conditions
Median equivalent incomwe (PPP)
2010 2011 2012 2013 2014 2015 20162009 20172008 2018 2019
20,000
16,000
12,000
26.0
40
30
20
10
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Inequality (S80/S20)
7
6
5
4
3
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Eurostat, INE (Spanish National Statistics Institute). Compiled by authors.
Finally, in terms of income distribution, the S80/S20 index (which measures the ratio of the top 20% of people in per capita income to the bottom 20%) rose again slightly last year, after falling to levels approaching those of Germany following the 2008 crisis. It is therefore worth analyzing in a little more detail what has happened since the last crisis of 2008 with the distribution of the population’s income.
Graph 1.3 shows the change in average per capita equivalent income by income decile in constant terms. Several periods are observed. The first, between 2008 and 2014, reflects the most immediate consequences of the crisis, with a general fall in income that was more intense the lower the income level. In other words, the poorest suffered the most. In the second period, between 2014 and 2016, incomes increased across the board, and did so to a greater extent among those with lower incomes. This is the only period when inequality decreased. Finally, between 2016 and 2018 incomes fell again among the lower income strata, remained fairly stable in the intermediate strata, and increased in the higher strata. As a result, it can be seen that by 2018 none of the income levels had recovered the real average income levels of 2008, and it is the lower income strata that have seen their purchasing power decrease the most. It is important to try to prevent this situation from recurring in the face of the current pandemic.
It is important to ensure that those in the lowest income groups do not see their purchasing power reduced
13
GRAPH 1.3 Change in average per capita equivalent income by income deciles (%, constant prices 2016)
10
0
–10
–20
10% poorest (D1) 10-20% (D2) 20-30% (D3) 30-40% (D4) 40-50% (D5) 50-60% (D6) 60-70% (D7) 70-80% (D8) 80-90% (D9) 10% richest (D10)
Source: Poverty and Social Inequalities Survey (PSIS) 2008-2016 and Social Services Demand Statistics-Social Needs Survey (SSDS-SNS) 2014-2018.
1.3 Situation of the business fabric: Behavior and performance
This section presents various aspects of the behavior and performance of firms in terms of innovation, internationalization, financing, labor costs and productivity.
1.3.1 Innovation
The definition of business innovation is based on the Oslo Manual (OECD/Eurostat, 2019), which has recently been amended (as explained in Appendix 4). This resulted in a break in the innovation survey time series, which does not allow a comparison of 2018 results with previous years. The analysis is therefore limited to comparing the data from the Basque Country and Spain, through their respective innovation sur- veys. The comparison includes, in some cases, Germany, whose data have been provided by the Centre for European Economic Research (ZEW).
Table 1.3 includes the innovative behavior of firms with ten or more employees, dis- tinguished according to the sector (industry and services)7 and firm size. Starting with the type of innovation, the percentage of firms in the Basque Country with some type of innovation (38%) is higher than in Spain (28%) but significantly lower than in Germany (64%), with innovation being somewhat higher in industry than in services, and significantly higher in large firms than in small ones. In terms of the type of innovation, the comparative disadvantage of the Basque Country with Germany lies in
7 The whole industry is included (B: Extractive industries, C: Manufacturing industry, D: Supply of elec- tricity, gas, steam and air conditioning and services, and E: Water supply, sewerage, waste management and decontamination activities) and the part of the services most related to industrial activity (46: Wholesale trade and agents; except of motor vehicles and motorcycles, H: Transport and storage, J: In- formation and communications, K: Financial activities and insurance, 71: Architectural and engineering technical services; technical testing and analysis, 72: Research and development).
14
both products and processes (which incorporates both innovation in production processes, and organizational and marketing innovation). The product disadvantage is mainly for small firms, as in the case of medium and large firms the distance to Ger- many is significantly reduced.
In terms of the economic impact of product innovation, the proportion of sales from unchanged or slightly modified products is similar across the three territories, and it is the large firms that have the highest proportion of sales from innovative products. In the case of the Basque Country, the difference between industry and services is not as marked as in the other territories, with the percentages of sales of innovative products being very similar.
Turnover in the Basque Country from innovative products is more than one point higher than in Germany for products new to the market (4.8%), but lower than in Spain. However, sales of new products for the firm (10%) are lower than in Germany, also by more than one point, although higher than in Spain. In terms of business size, small, medium and large Basque firms show better innovative behavior, except in the specific case of sales of new products for the market by large firms, which do not exceed those of Spain.
The results with respect to innovation expenditure show that there is a positive re- lationship between spending on innovative activities and innovation, meaning that where there are higher proportions of firms with innovation expenditure, higher ratios of innovative firms are observed. Expenditure on innovative activities accounts for 2.4% of turnover in the Basque Country, compared with 1.3% and 3.4% in Spain and Germany respectively, which indicates that the intensity of expenditure on innovation by Basque firms is greater than that of Spain as a whole, but does not reach that of German firms. In the Basque Country, the service sector is more intensive than the industrial sector, unlike in other territories, especially Ger- many. This is due to the accounting of technology centers and disaggregated R&D units, whose weight is also reflected in medium-sized firms. It should be noted that the proportion of turnover devoted to innovation expenditure in small Basque firms is almost comparable to that of German firms. As regards the type of expenditure on innovation, in the Basque Country as in Spain, more than half is allocated to internal R&D.
Cooperation in innovation is significantly more widespread among Basque firms than among Spanish firms, with almost 17% of them cooperating in R&D activities and another 10% in other innovation activities. Industrial firms cooperate in R&D firms more than service, while in cooperation in other innovation activities the service sector exceeds the industrial sector.
In summary, it can be concluded that Basque firms are more innovative than Span- ish firms and less innovative than German firms, but there are some significant dif- ferences when comparing with the latter. Although the percentage of German innovative firms is higher in both industry and services, Basque service firms show some better results than their German counterparts, as they report a higher percentage of sales for products that are new to both the firm and the market. This may be a result of their increased spending on innovation. Thus, although industrial firms are more innovative than service firms, the latter are more innovative than those of the Ger- man benchmark.
The main innovation gap is among small firms
The intensity of R&D spending in small Basque firms is similar to their German counterparts
15
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1.3.2 Internationalization
This section deals with the variation of exports and the profile of exporting firms on the one hand, and the situation regarding foreign direct investment (FDI) on the other. Thus, Graph 1.4 shows how the Basque Country maintains a trend in line with that of the rest of the territories considered throughout the period, although somewhat more irregular. In 2019, after two years with higher growth, Basque exports decreased by 1.5%, unlike the other territories, whose exports increased. This different variation is due to the weight of energy exports, which in previous years contributed to the growth of total exports and explains the decrease that occurred last year: exports from this sector decreased by almost 27% and, in contrast, those from the total non-energy sectors grew by 1.6%. Among the energy products, the decline in oil and oil derivative exports (25%) was noteworthy. This fall was partly due to falls in production due to technical stoppages for maintenance and adaptation of facilities, and a worse commercial margin environment.
GRAPH 1.4 Evolution of the value of exports of goods valued in euros (2007=100)
20082007
140
100
60
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Unctad and Eustat (Basque Statistics Office).
The profile of Basque exporters of goods is presented in Table 1.4.8 In 2019 the export base increased by almost 7% to over 17,000 firms. This increase has a positive impact on the proportion of Basque exporting with respect to both Spanish firms and Basque firms (with employees), which increased in both cases. However, it should be noted that the number of regular exporting firms, i.e. those that have ex- ported in the last four consecutive years, has decreased (whereas in 2018 this type of firm grew). This is also the case in Spain, but to a significantly lesser extent. Even so, in the Basque Country there is still a higher percentage of regular exporters than in Spain. In addition to whether exports are sporadic or regular, the diversity of markets reached must be considered. In this sense, the Basque Country has little pres-
8 The time series from 2007 can be found in Appendix 5.
The fall in exports in 2019 was due to energy exports
The exporting base of the Basque economy has increased
17
ence in Asia (only 8% of exports), which constitutes one of the most dynamic, future markets for the world economy.
In terms of export volumes, the absolute number of firms exporting more than €50,000 increased in 2019, but their share in the total number of exporting firms fell, as has been the case since 2010. This makes sense because, firms that start exporting can do so with low volumes. Therefore, the decrease in the value of exports observed in Graph 1.4 is reflected both in a lower proportion of Basque exports than Spanish ones, and in a lower average value of exports. A similar impact is observed at the level of regular firms, whose share in total exports decreases in the Basque Country.
As regards concentration, the trend continues: in the Basque Country the top five firms by export volume account for 26% of exports and the top one thousand for 96%, while in Spain the top five firms account for 10% and the top one thousand for 67%.
TABLE 1.4 Profile of Basque exporters compared to Spanish exporters (2018, 2019)
2018 2019
No. of exporters 15,900 17,009
% of Spanish firms 7.8 8.1
% of total firms with paid employees 21.4 23.8
% of firms with over €50,000 in exports 18.9 18.3
% of Spanish firms with over €50,000 in exports 7.9 8.0
% of regular exporters, Basque Country 31.9 30.7
% of regular exporters, Spain 25.4 25.3
Indicators linked to export value
Value of exports, Basque Country (million €) 25,773 25,389
% of Spain’s export value 9.0 8.8
Average value of exports per firm, Basque Country (thousand €) 1,621 1,493
Average value of exports per firm, Spain (thousand €) 1,398 1,387
% of exports, firms with over €50,000 in exports 99.8 99.8
% of exports, 5 largest, Basque Country 27,0 26,0
% of exports, 5 largest, Spain 10,0 10,0
% of exports, 1,000 largest, Spain 67,0 67,0
% of export value, regular exporters, Basque Country 95,0 94,0
% of export value, regular exporters, Spain 95,0 95,0
Source: ICEX (Spanish Institute for Foreign Trade) and INE (Spanish National Statistics Institute).
18
Moving to FDI, inflows of FDI are associated with aspects such as the attractiveness of a territory to do business, access to its knowledge and/or high-level innovation system, markets, inputs, etc. Outflows of FDI, on the other hand, are an expression of the eagerness of the territory’s firms to expand, their strategies to enter international markets, the competitiveness of their offers and their capacity to manage international structures. In other words, the input indicators reflect local advantages, while the output indicators point to organizational advantages, and a distinction is also made between the stock and flow of FDI.
In relation to FDI stock, Graph 1.5 shows that, as generally happens in advanced economies, the Basque Country has much higher values in terms of outward FDI (capital of Basque investors abroad) than inward. However, this could also be interpreted as a sign of barriers of a different type (for example, the cooperative nature of much of its business fabric, which hinders its acquisition by foreign capital) or even —according to Dunning’s eclectic theory, which includes the conditions which must exist for that direct investment to take place— fewer location benefits in the Basque economy to attract said capital. Whatever it may be, the Basque Country appears to be in line with such advanced economies as Germany, Japan and Korea, character- ized by a high degree of specialization in manufacturing and a relatively small stock of foreign direct investment captured from abroad. On the other hand, the high values of outward stock are a reflection of investments and rollouts by Basque firms abroad.
GRAPH 1.5 Inward and outward FDI stock (% of GDP, 2019)
Latvia Lithuania
Japan
Finland
Italy
Norway
Source: Ministry of Economy, Industry and Competitiveness, foreign investment bulletins. UNCTAD. Eustat (Basque Statistics Office). Compiled by authors.
NB: Several OECD countries with a stock of inward and/or outward capital above 100% (Belgium, Ireland, Lu- xembourg, Netherlands and Switzerland) are not included in the graph).
The Basque Country stands out for its stock of outward FDI
19
The stock analysis is complemented analysis of the variation of FDI, although it should be borne in mind that these flows are highly volatile because they are altered by large corporate operations that are not repeated periodically. Moreover, part of the fluctuations in flows are caused by investments in the financial sector, which are more volatile than those in the productive economy. Taking into account this volatility, Table 1.5 shows that between 2013 and 2015 there were large inflows of FDI into the Basque Country, exceeding the Spanish and German ratios in almost all these years and, in many years, those of the European average. How- ever, in the last two years, inflows have been lower than in other territories. As for the variation of FDI outflows from the Basque Country, they held up better than in the other economies until the Basque economy received the second major blow of the crisis in 2011. From there it fluctuates between very low levels and a certain recovery, which in the past two years has resulted in flows below the other territories.
TABLE 1.5 Foreign direct investment flows (% of GDP)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
FDI inflow (% GDP)
UE28 4.6 1.6 2.6 2.3 2.7 2.3 2.0 1.7 3.9 3.6 2.7 2.2 2.4
Germany 2.3 0.2 0.7 1.9 1.8 0.8 0.3 –0.1 0.9 0.5 1.6 1.9 1.0
Spain 4.4 4.7 0.7 2.8 1.9 1.9 2.1 1.7 0.7 2.6 3.0 3.2 0.9
Basque Country 2.3 0.5 0.2 0.3 0.8 0.7 1.7 2.1 1.2 2.8 3.7 1.2 0.3
FDI outflow (% GDP)
UE28 6.8 4.0 2.5 2.8 3.0 2.0 2.1 1.5 4.2 2.7 2.9 1.8 2.5
Germany 4.9 1.9 2.0 3.7 2.1 1.8 1.1 2.2 2.9 1.8 2.8 2.0 2.6
Spain 9.3 4.6 0.9 2.7 2.8 –0.3 1.1 2.7 3.5 3.6 4.0 1.9 1.7
Basque Country 42.4 7.1 2.3 3.2 8.1 0.7 2.0 1.1 0.8 4.7 2.6 1.2 1.2
Source: Ministry of Economy, Industry and Competitiveness, foreign investment bulletins. UNCTAD. Eustat (Basque Statistics Office). Compiled by authors.
Other indicators of the internationalization level of the local productive fabric re- late to the shareholding interest held by local firms in foreign firms, and the interest of foreign-owned firms in local firms. In the first case, Table 1.6 shows that shareholdings in firms abroad held by both Basque firms and those from the rest of Spain have been increasing in recent years, and this figure is higher in the case of Basque firms of all sizes. Shareholdings in local firms held by foreign shareholders have also increased but are lower in the Basque case than in Spain. This means that the percentage of Basque firms with shareholdings abroad is greater than those which are affiliates, with the opposite being true for Spanish firms of every size since 2017.
20
TABLE 1.6 Firms with foreign shareholders
% companies active with partners abroad % active companies with foreign shareholders
Range of employment Range of employment
<50 50 y 249 >249 Total <50 50 y 249 >249 Total
Rest of Spain 2008 0.4 9.1 30.4 0.7 Rest of Spain 2008 0.7 8.7 24.7 1.0
2011 0.5 11.7 32.8 0.9 2011 0.8 10.3 24.6 1.1
2013 0.6 12.9 29.7 1.0 2013 1.0 12.4 25.3 1.3
2017 0.9 14.7 32.4 1.3 2017 1.4 15.6 31.9 1.8
2019 1.0 14.0 32.2 1.4 2019 1.5 15.3 32.2 2.0
Basque Country
2008 0.7 10.5 18.6 1.2
2011 0.9 19.7 37.2 1.7 2011 0.7 10.3 15.2 1.1
2013 0.9 19.1 35.1 1.7 2013 0.9 10.5 17.6 1.3
2017 1.2 22.1 38.5 1.9 2017 1.2 15.0 23.1 1.7
2019 1.3 19.2 39.5 2.0 2019 1.2 14.9 24.7 1.8
Source: SABI-Informa. Compiled by authors.
In summary, the Basque economy closed 2019 with a certain decline in exports (caused by the fall in energy exports), which placed the ratio of exports to GDP below even the value of Spain. Even so, the percentage of exporting firms continued to grow, albeit with a slight fall for regular exporters and a higher proportion for those with a low export volume. Although outward and inward FDI flows have declined in the last two years, it is an economy with a high stock of investment abroad. The percentage is very similar between firms with foreign shareholdings (2%) and foreign shareholders (1.8%). However, this depends on the employment bracket, as in medium and large firms the percentage of firms with foreign holdings is significantly higher than that of those with foreign shareholders.
1.3.3 Firm finance
One of the first economic measures taken in response to the pandemic was the pro- vision of cash flow to the system, which has made it possible to avoid a cash flow shock as happened in 2008 and to give firms peace of mind in the short term. Al- though the European Central Bank has announced that it will maintain a policy to ensure cash flow in the economy,9 the perception of firms is negative, as for the first time since 2014 the expectations that firms have about access to financing have deteriorated.10 In view of this scenario, it is necessary to know the starting situation of the balance sheets and profit and loss accounts of Basque firms, given that the ability to obtain financing will determine their capacity to resist and make necessary decisions for recovery. The situation in the Basque Country is compared with that of Spain, based on the Sabi database; and indirectly with the EU10 (hereinafter in this section, Europe), by comparing the Spanish and European situations according to the BACH database.
9 https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.mp200910~f4a8da495e.en.html 10 Survey on the access to finance of enterprises (SAFE). October 2019 to March 2020. European Commis-
sion. May 2020.
The expectations of firms with regards access to finance have deteriorated
Table 1.7 shows the variation in different indicators related to the percentage share of the main balance sheet items, income statement items and profitability and in- debtedness indicators. The situation of the Basque Country balance sheet shows a greater weight of own resources than in Spain (45.6% compared to 43.6%), and a greater use of trade financing (21.4% compared to 19.2%). The Basque Country, like Spain, has increased the weight of equity on the balance sheet, especially in the period comprising 2008 to 2013 (8.7 percentage points), and reduced financial debt (financial debt has been reduced by 8.1 percentage points); in comparison with Europe, in Spain the increase in the weight of equity and the decrease in the weight of financial debt have been very noticeable. It can be concluded that the weight of equity is greater, and that that of financial debt is considerably lower in the Basque Coun- try than in Europe. On the other hand, firms in the Basque Country stand out from Spanish firm

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